Robert Samuelson April 2, 2014

What’s occurring in Ukraine, says the Peterson Institute’s FredBergsten, is an unwelcome consequence of globalization. RussianPresident Vladimir Putin thinks he can enjoy political and militaryfreedom in dealing with Ukraine without experiencing crippling economiccosts from sanctions or the exit of multinational firms from Russia.

Call this Putinomics. It presumes that Russia’s “trading andinvestment partners are so committed to their own economic intereststhat, for all the talk of tough sanctions, they will not upset the apple cart in meaningful ways,” Bergsten says. Commerce dominatesgeopolitical interests. This gives Putin the freedom to pursue both. Inthis skewed system, economic interdependence makes effective sanctionsdifficult and often impossible.

To be sure, Russia has sufferedeconomically from seizing Crimea and threatening Ukraine. Capitaloutflows have surged: Investors dump Russian stocks and bonds, convertthe proceeds from rubles to dollars or euros and move the money out ofRussia. Economist Lubomir Mitov of the Institute of International Finance, an industry think tank, says that capital outflows jumped to a nearrecord $70 billion in 2014’s first quarter and might be as high as $170billion for the year. The ruble depreciates, making imports moreexpensive and raising inflation.

Economist Anders Aslund of the Peterson Institute, an expert on Russia and Eastern Europe, predicts inflation of 6.5percent for the year and thinks that the crisis “has shaved off 2percent” of gross domestic product (GDP), the economy’s output. Thiswould signal a recession. Russia’s growth last year was a meager 1.3 percent, reports the consultancy IHS. Uncertainty and capital flight will weaken consumer spending and business investment, says IHS.

But Putin treats these setbacks — driven mostly by market decisions, notgovernment sanctions — as short-term costs dwarfed by the long-term gain of reacquiring Crimea. His further ambitions are unclear. “My basicview is that Putin is intent on taking half of Ukraine,” says Aslund.“The question is when” — and whether added sanctions might deter him. So far, sanctions have been modest, mainly involving asset freezes andvisa restrictions on a few Russian officials.

Tougheningsanctions will be hard for both macro and micro reasons. Start with themacro. Russia is among the world’s top oil producers. Logically, sternsanctions would crimp oil sales, which provide the bulk of Russia’sexports and tax revenues. But reduced Russian sales would probably pushup oil prices and weaken the fragile global economic recovery. Notpopular.

Now the micro.

Among big firms, the distaste for sanctions is tangible. In late March, Joe Kaeser, chief executive officer of the giant German firm Siemens, flew to Moscow, met with Putin and declared that “we support a trusting relationship with Russian companies.” Siemens sells high-speed trains to Russian Railways. In 2011, ExxonMobil signed a co-production agreement with Rosneft, the largest Russian oil company. ExxonMobil chief executive Rex Tillerson recently said cooperation was proceeding normally.

At best, the record on sanctions is mixed. A Peterson Institute study of 204 cases from 1914 to 2000 judgedtwo-thirds as failures. Sanctions did not cause Castro’s Cuba tocollapse. They did not deter North Korea from building nuclear weapons.Although they may have pushed Iran into serious negotiations over itsnuclear program, they haven’t yet forced it to change the programsignificantly.

Sanctions fail because target countries believeother goals (including survival) outweigh economic costs. Sanctions arealso evaded. To succeed, they must be widely honored. In 1980, after the Soviets invaded Afghanistan, President Jimmy Carter limited grain shipments to them. Led by Argentina, other suppliers filled the void. The Reagan administration later barred Caterpillar from selling 200pipe-layers to the Soviet Union; the business went mainly to Japan’sKomatsu.

Economic warfare is often costly for both sides. Putin’s central insight is that the other side is risk-averse. Althoughsanctions could be strengthened, the odds seem against it. Many U.S.executives see sanctions as a “lose-lose” proposition: U.S. firms loseforeign sales (“you get tagged as an unreliable supplier,” says aCaterpillar executive); and the U.S. government doesn’t achieve itspolitical goals. With closer ties to Russia, Europe has greaterreservations. It also dreads the effects of a cutoff of Russian naturalgas, even though this gas supplies only about 7 percent of Europe’s total energy.

The essence of Putinomics is to exploit these fears. Collective commerce,which was supposed to muffle bellicose behavior, loses much of itsrestraining power. Bergsten worries that China may one day resort tomilitary aggression to achieve its goals on the same assumption that its economic partners can’t — or won’t — retaliate. It’s an unsettlingthought.

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